We describe the first study of structure–processing–property relationship in organic/inorganic hybrid network structure nanocomposite scaffolds based on grafted chitosan for bone tissue engineering. Chitosan was first grafted with propylene oxide to form hydroxypropylated chitosan, which was subsequently linked with ethylene glycol functionalized nanohydroxyapatite to form an organic/inorganic network structure. The resulting scaffold was characterized by a highly porous structure and significantly superior physico-chemical, mechanical and biological properties compared to pure chitosan. The scaffolds exhibited high modulus, controlled swelling behavior and reduced water uptake, but the water retention ability was similar to pure chitosan scaffold. MTT assay studies confirmed the non-cytotoxic nature of the scaffolds and enabled degradation products to be analyzed. The nanocomposite scaffolds were biocompatible and supported adhesion, spreading, proliferation and viability of osteoblasts cells. Furthermore, the cells were able to infiltrate and colonize into the pores of the scaffolds and establish cell–cell interactions. The study suggests that hydroxypropylation of chitosan and forming a network structure with a nano-inorganic constituent is a promising approach for enhancing physico-chemical, functional and biological properties for utilization in bone tissue engineering applications.